Survey Measures of Inflation Expectations

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According to the latest figures, the monthly CPI inflation rate decelerated in May, continuing its recent trend after a short-lived spike in early 2012 caused mainly by oil prices. The year-over-year change in the CPI was 1.7 percent at the end of May, which represents the continuation of a steady decline that began last September when the rate was 3.9 percent. The monthly (annualized) rate even came in negative at −3.4 percent. By comparison, it was 5 percent in February.

Both the year-over-year and month-to-month figures largely reflect the effect of energy prices, which make the CPI relatively volatile. On the other hand, the inflation rate for all items excluding food and energy, the so-called core inflation rate, increased 2.4 percent in annualized terms in May. The annual change in that measure has hovered between 2.2 percent and 2.3 percent in the last six months. So, while CPI inflation has fallen since early spring, core inflation has been stable.

The inflation question on everyone’s mind is whether the recent pace of inflation will continue in the short and long term. To gauge what households and professional forecasters think about that, we look at two surveys: the University of Michigan’s Survey of Consumer Attitudes and Behavior (UM expectations) and the Philadelphia Fed’s Survey of Professional Forecasters (SPF expectations). The University of Michigan survey is conducted monthly, while the SPF is quarterly. The most recent UM survey was in June, and the most recent SPF was in May. The University of Michigan does not specify a particular basket for its questions on inflation expectations, whereas professional forecasters are asked their opinions on the CPI and the core CPI.

One-Year Inflation Expectations from Surveys

Source: Federal Reserve Bank of Philadelphia; University of Michigan

The one-year inflation expectations of households spiked in March, reaching 3.9 percent, most probably due to higher energy costs in the early spring. Recently, households’ inflation expectations and energy prices have been closely linked. Their expectations eased in recent months, falling to 3.0 percent in June, following the decline in gas prices. Professional forecasters, on the other hand, slightly raised their 1-year expectations for both the CPI and the core CPI in the last survey, though they are currently at 2.2 percent and 2 percent, respectively.

2012:Q4 Core CPI Probabilities

Source: Federal Reserve Bank of Philadelphia

The SPF also asks respondents to assign probabilities to particular ranges for the end of the current year’s and the next year’s annual core CPI inflation rate. Over time, the respondents have shifted their opinions about the range they deem most likely for the core CPI at the end of 2012. Currently, the average probability they assign for the 2.0-2.5 percent range is over 40 percent, about 13 percent higher than the second-most likely range of 1.5-1.9 percent. As for the annual core CPI at the end of 2013, they think that the same 2.0-2.5 percent range is the most likely outcome, with an average probability of 31 percent. These probabilities show that, although there has been an increase in core CPI expectations, the increase is consistent with where the core CPI stands now, at slightly over 2.0 percent.

2013:Q4 Core CPI Probabilities

Source: Federal Reserve Bank of Philadelphia

Finally, we look at long-term inflation expectations from both surveys. Long-term expectations have been more stable than short-term expectations. Households’ long-term expectations hovered between 2.7 percent and 3 percent in 2012, while currently they are at 2.9 percent. The SPF 5- and 10-year ahead inflation expectations are even more stable and are currently at 2.4 percent and 2.5 percent, respectively. Both surveys show firm anchoring of long-term expectations and reflect no fear of high inflation or deflation in the long term.

Long-Term Inflation Expectatiosn from Surveys

Source: Federal Reserve Bank of Philadelphia; University of Michigan

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